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Leading economist now expects house price falls of 20% in Melbourne and Sydney

Life can be incredibly difficult as an economist (apart from the pay), as it involves trying to estimate what the future holds. Invariably it’s impossible to accurately predict because the future is uncertain.

The leading economist Shane Oliver from AMP Limited (ASX: AMP) has seemingly tried to improve people’s mood about AMP by predicting house prices in Melbourne and Sydney could fall 20% from peak to trough. That’s a major fall!

Mr Oliver is aware of the impossible task of forecasting. Indeed, he once published an article with a number of economist jokes including these three zingers:

“Three economists went target shooting. The first missed by a metre to the right, the second missed by a metre to the left and the third exclaimed “we got it”.”

“Economists have predicted six of the last two recessions.”

“An economist is a trained professional paid to guess wrong about the economy.”

Around a year ago Mr Oliver penned an article for Livewire saying that we could expect prices to fall 5% to 10%, maybe less in Melbourne due to population growth, over two years.

However, he has just published an updated prediction stating that property prices in Sydney and Melbourne could now see price falls of 20% as credit conditions tighten, supply rises and a negative feedback loop from falling prices develops.

He listed a long list of reasons why prices have fallen and could keep falling

  • Continued poor affordability
  • Tightening of banking lending standards under pressure from regulators
  • Interest only loans switching to interest & principal
  • Banks withdrawing from SMSF lending
  • A cutback in foreign investor demand
  • Rising unit supply
  • Out-of-cycle mortgage rate increase
  • Falling price growth expectations resulting in ‘FONGO’ (fear of not getting out)
  • Expectations that negative gearing and capital gains tax concessions will be reduced

Not an uplifting list, is it? Together, Mr Oliver thinks this could create the perfect storm for the property market.

Auction clearances in recent weeks suggest price declines of 7% to 8% per annum, which could continue for the next couple of years.

However, even if this did happen, prices would only go back to 2015 levels. Hardly a cheap-as-chips level of prices.

Despite a worsening outlook, Mr Oliver still believes that a 20% crash of average national prices is unlikely.

That will be music to the ears of executives at big banks like Commonwealth Bank of Australia (ASX: CBA) and retailers like JB Hi-Fi Limited (ASX: JBH). A crash of house prices would be terrible for everyone across the country.

Foolish takeaway

I definitely wouldn’t be considering an investment property at this point. To me, it seems almost certain that we will see price falls of at least 10% in Melbourne and Sydney. Who knows if a drop of 20% or more will happen, but there are a lot more downside risks for property and banks right now.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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